Offshore engineering to cause trouble for COSCO?

COSCO's inexperience in building tender rigs, jack-ups, and drillships may cause volatility in its earnings.

The company's efforts to build up its offshore marine engineering capabilities accounts for >50% of new orders in FY2011. However, the offshore segment could take a substantial period of time before it sees any significant productivity improvements.

Here's more from OCBC Investment Research:

COSCO Corporation Singapore Limited is one of the largest ship repair and shipbuilding yards in China. It is also involved in dry bulk shipping and shipping agency operations. In recent years, it has made significant efforts to build up its offshore marine engineering capabilities such that the offshore segment accounts for >50% of new orders in FY2011.

Diversity of product and service offerings
The group’s shipyards provide a wide variety of services including ship repair, shipbuilding/ conversion and marine engineering. This diversification helps COSCO lower its risk profile. For example, ship repair work is typically less cyclical, and therefore provides a stable base-load of work for its yards.

Weakness in shipping and ship-building industries
The operating environment for dry bulk shipping and shipbuilding segments remains difficult. The Baltic Dry Index, a measure of bulk shipping costs, has sunk to a 25-year low in Feb 2012 and the shipping industry is reeling from an oversupply of vessels. Shipbuilders are also suffering from fewer and less profitable newbuild orders.

Offshore engineering may take time to get up to speed
COSCO is a new entrant to offshore engineering, and it is relatively inexperienced in building tender rigs, jack-ups, FPSOs and drillships. As productivity improvements usually result from numerous adjustments to work processes made over time, the offshore segment could take a substantial period of time before it sees significant productivity improvements.

As COSCO is currently scaling up the “learning curve” for its offshore business, its earnings could be highly volatile.

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